Hedge fund managers refusing to provide transparency is the single greatest reason for an investor veto, according to Deutsche Bank’s latest survey.
The bank’s Global Prime Finance group’s third annual Operational Due Diligence (ODD) Survey, which polled investors globally representing over $2.72 trillion of assets, shows the five most frequently cited red flags are an unwillingness to provide transparency, inadequate compliance policies, poor segregation of duties, lack of experience in critical roles and inappropriate valuation policies.
Investors and regulators require more robust operating infrastructure across all levels of a hedge fund’s business, according to the survey, while emerging managers in particular were identified as being more likely to provide greater transparency.
Expenses charged to funds came under scrutiny in the survey, 64 percent of respondents will investigate miscellaneous expenses and may place limits. Investors have little tolerance for expenses such as employee compensation, marketing and non-research related travel being charged to the fund.
Valuation was in sharp focus for 38 percent of the responding investors in 2014, as valuation concerns were a top five reason investors issued a veto over the past year.
Hedge fund compliance and regulatory frameworks are also of critical importance, with 73 percent of investors to increase their focus on compliance and regulatory frameworks in 2015.
Scott Carter, co-head of global prime finance and distribution for the Americas, said: “Investors increasingly access hedge funds as part of a broader set of portfolio solutions which deliver superior risk adjusted returns.”
“With this comes an expectation for robust operational controls and we are seeing hedge funds successfully respond to these demands.”
